Source: The Treasury
The Treasury has published its final 2025 Long-term Insights Briefing (LTIB), titled Te Ara Mokopuna, which explores the circumstances under which fiscal policy can be used to buffer the economy from shocks and cycles, and how to do so in a sustainable and effective way.
The briefing emphasises that monetary policy remains the primary tool for managing economic upturns and downturns. However, there may be circumstances in which fiscal policy has a role to play in responding to shocks and cycles, such as:
– Ensuring critical services and infrastructure are maintained or rebuilt.
– Addressing the distributional impacts of shocks on communities.
– Providing economic stabilisation when monetary policy has less room to move or is constrained by extremes (e.g., near-zero interest rates).
The briefing also underscores that when fiscal interventions are required, they should be timely, temporary and targeted, with clear exit strategies in place. The briefing provides an overview of effective and less effective tools, with lump-sum payments, wage subsidies, and targeted adjustments to benefits or fees seen as more effective; and tax changes, new infrastructure investments, and permanent public consumption increases due to timing and reversibility challenges as less effective.
Reflecting feedback from the consultation period, the LTIB notes that the involvement of other stakeholders, including private businesses, communities and local government is critical. Fiscal policy should not undermine the incentives for others to prepare for shocks.
“Feedback highlighted there may be an increasing frequency and complexity of shocks, particularly due to climate change, and the important roles of insurance and local authorities in responding to natural disasters,” Iain Rennie said.
“The Treasury agrees that maintaining the resilience of the private sector is important, and that responses to shocks requires the involvement of other stakeholders, including local government and private businesses, and encourages others to prepare for these events.”
Treasury Secretary Iain Rennie noted that the ability to use fiscal policy to respond to shocks highlighted the need for governments to keep debt at prudent levels.
“New Zealand’s economy is particularly vulnerable to ups and downs because of our small size, reliance on overseas markets, and high household debt.
“As a country, we need to have the capacity to respond to economic shocks when they occur. This will require successive governments to build a buffer – by setting sustainable medium-term fiscal intentions and running operating surpluses between shocks and downturns.
“Internationally we can see that governments tend to increase spending in a downturn or after a shock but fail to offset this with savings when times are good. This has also been the case in New Zealand, contributing to our rising level of public debt over time.
“The final 2025 Long-term Insights Briefing represents the Treasury’s commitment to promoting fiscal sustainability and improving wellbeing for future generations of New Zealanders,” Iain Rennie said.
Te Ara Mokopuna reflects feedback received in a two-phase consultation process. The first phase (June-July 2024) sought input into the briefing’s scope, and the second phase (April-May 2025) focused on the draft briefing. This involved public submissions and targeted engagement including with macroeconomic and fiscal experts.
“I would like to thank everyone who made submissions and those who contributed during consultation on the briefing.
“The feedback has been valuable in helping to shape the final briefing. Contributions will also help to inform our future policy advice and development of the Treasury’s forthcoming stewardship reports,” Iain Rennie said.
Feedback reflected the critical role of our institutional arrangements in delivering sustainable and effective fiscal policy, and also focused on lessons learned from recent fiscal responses to shocks and cycles, the respective roles of monetary and fiscal policy in responding to the business cycle, and the role of the Crown’s balance sheet, including public investments, in managing our exposure and preparedness to shocks.
The Treasury has two further stewardship reports due for publication which will build on the themes raised in the LTIB. The 2025 Long-term Fiscal Statement will consider long-term pressures on New Zealand’s fiscal position and the choices available to successive governments to return to a fiscally sustainable path. The Investment Statement will consider how governments’ management of the Crown balance sheet, including debt levels and investments, can support New Zealand’s living standards across generations. These are due to be published in the coming months.
